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Mitul Kotecha, Head of Forex & EM Macro Strategy Asia, Barclays, says the dollar and US yields being on the rise, is likely to pull money away from other parts of the world. It’s not clear if that cash will flow from China to India, even though we’ve already noticed a significant exit of foreign investors from India. Some worries coming out of India include a slowdown in growth and uncertainty surrounding the central bank and the possibility of a new governor after Shaktikanta Das retires on December 10, 2024. Also, it’s not just India that could feel the pinch; China and other emerging markets might also experience outflows.
We were just alluding to that India-China trade and given all of that is going on like the US yields, the inflation view limit for Fed, what is the outlook on the China trade?
Mitul Kotecha: As you are saying in your previous conversation, there has been optimism towards China stimulus and we saw that with a big bounce in equities, but the reality of the situation is that the stimulus has disappointed as we saw recently at the NPC meeting and all we really saw was a net 6 trillion yuan debt swap. We did not see anything in the property sector. We did not see anything with regard to putting money in the hands of consumers and it is likely that the Chinese authorities are keeping their powder dry and waiting to see what the new Trump administration is going to look like and what tariffs are going to look like, although we know that Trump has talked about 60%, will we get to 60%? The US economy is still very resilient and with the dollar remaining very strong, some of that optimism is clearly unwinding. And as you alluded to that perhaps is also having an impact on that reallocation shift from Indian to Chinese equity markets as well. So, we are seeing that with the CNY, the Chinese currency is coming under pressure amidst the strong dollar. So, now we wait for the December work conference in China. We will also have the March National People’s Congress meeting next March and we may see further clues. But for now, some of that optimism clearly has waned.
If money moves out of China, will it move back to India or will it move back to us that is I think the most important question.
Mitul Kotecha: It is a very good question and look, at the moment the US is acting like a big vacuum. It is just sucking money from the rest of the world with the amount of money that is going to go through tax or at least expectations of tax cuts, deregulation, and the way that the US is becoming more isolationist and this sort of pro-growth, wider fiscal deficit, that will probably support growth in the US.
It means that the dollar and with US yields moving higher as well, will continue to suck money out of the rest of the world. And so it is not obvious that that money goes out of China and into India. Although, arguably, we have already seen quite a sharp outflow from foreign investors from India already. Some of the concerns in India are and that we are hearing is that growth is starting to moderate. There is uncertainty about what will happen in terms of the central bank and a new governor and clearly there are some concerns about how the dollar strength and higher US yields impacts most emerging markets. It is not just India, China could see outflows. It is also the rest of the emerging market spectrum that is coming under pressure.
And is the US going to be the obvious beneficiary, is all the money which is going to pull out of China and has been from India is going to move towards us?
At least for now, that seems to be the case. But what is interesting, when you even look at US markets, at least in the equity market, is that around half of that rally in the S&P post the election has been unwound. So, even in the US, there is a bit of wait and see where we are seeing the President Trump or Trump elect now nominating positions for his administration. Some of these have obviously been very interesting from a market perspective and we will see how that pans out, whether the Senate confirms these nominations.
We are probably in a little bit of a wait and see mode. I do not think the Trump trade is over. Certainly, in the FX, we continue to see the dollar moving higher and going back to that previous conversation, in an environment of dollar strength and further dollar strength likely, it is going to be tough for other markets, other emerging markets, but not just emerging markets, even Europe continues to suffer at the hands of a stronger US economy and a strong dollar. So it continues to see the US benefit in this environment. Hard to see that turnaround anytime soon.
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